Natera, Inc.

Welcome to Natera's 2021 fourth quarter and full year financial results conference call. At this time, all participants are on a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. To ask a question at the time, please press star followed by one on your touchtone phone. If anyone has difficulty hearing the conference, please press star zero for operator assistance. As a reminder, this conference call is being recorded today, February 24th, 2022. I would now like to turn the conference call over to Michael Brophy, Chief Financial Officer. Please go ahead.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our fourth quarter of 2021. On the line is Steve Chapman, our CEO, and Solomon Moskovich, General Manager of Oncology. Today's conference call is being broadcast live via webcast. We will be referring to a slide presentation that has been posted to investor.natera.com. A replay of the call will also be available at investor.natera.com. During the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance, such as our operational and financial outlook and projections, our assumptions for that outlook, market size, partnerships, clinical studies, opportunities, and strategies, and expectations for various current and future products, including product capabilities, expected release dates, reimbursement coverage, and related effects on our financial and operating results. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we found from time to time with the SEC including our most recent Form 10-K or 10-Q and the Form 8-K filed with today's press release. Those documents identify important risks and other factors that may cause our actual results to differ materially from those contained in or suggested by the forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Materials claim any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. We will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison. And now, I'd like to turn the call over to Steve. Steve?

Great. Thanks, Mike. Good afternoon, everyone, and thank you for joining us. We've got a packed session full of announcements, so let's get into the recent highlights. 2021 was a breakout year for Natera. Volumes were up 53% year on year, which is higher than we pre-announced in January by more than 5,000 units. Despite all the disruption of the world from the Omicron variant, volumes were still very strong. We posted another record with 439,000 tests processed. In addition, this was also one of the largest sequential growth quarters we've ever seen on a net unit basis. Revenues were $625.5 million for the full year, above the top end of our November guidance, and more than $100 million higher than the midpoint of our original revenue guide given in February of 2021. Looking at the quarter, once again, Q4 was a very strong revenue quarter as we came in at roughly $173 million. Mike and I will spend more time on the drivers behind these numbers and the remaining financial results shortly. In addition to the excellent volume and revenue performance, we recently set a new standard for clinical data in the field of cell-free DNA with presentations and publications that can have a very meaningful impact on patient care. First is the recent presentation at the ASCO GI Conference from the prospective multi-site CIRCULATE trial, which showed that Signatera is predictive of treatment benefit in colorectal cancer. We also showed that Signatera has exceptional sensitivity at the post-surgical time point. This was the largest prospective data set ever presented using MRD testing in CRC, and the first to show MRD testing is predictive of treatment benefit in CRC. Second is the publication of the prospective multi-site smart trial in the Gray Journal, which is a leading journal in obstetrics and gynecology. With the SMART trial getting into publication in a top journal and with over 18,000 patients in the study, this now allows 22Q screening to be formally considered for ACOG guideline inclusion. There's a generally accepted set of criteria required for a disorder to be included in the prenatal testing guidelines, and we believe the study results achieved all of the performance metrics required to meet this objective. Finally, in organ health, we were able to release very strong, large-scale prospective data in each heart, lung, and kidney transplantation that we think can have a very positive impact when published. For example, in kidney, the trifecta study represents the largest prospective fully biopsy match study conducted to date, with nearly three times the number of biopsy match rejections as the DART study, which is one of the larger historical data sets in the space. We are very pleased that Prospera's performance in the study was exceptional, and we'll spend more time on all of these results later in the call. Finally, we are pleased to be guiding full-year 2022 total revenues at $770 to $790 million, which implies roughly 31% pro forma revenue growth over 2021 at the midpoint. The guide reflects our usual cautious approach, but there's upside opportunity as we see ourselves entering 2022 strongly positioned for continued growth across our portfolio. Okay, let's get into some of the business trends. The next slide is just an annual view of our volume growth over time. We have a long track record of execution, but you can see that something different happened in 2021 where we are benefiting from two fundamental trends in healthcare. First, the use of cell-free DNA in organ health and oncology is just getting started, and we are a leader in both fields. The volume from cancer products and organ health products are starting to make a significant impact on our growth. Second is the increased pace of NIPT adoption in the U.S., post ACOG guidelines, which drives not only NIPT volumes, but also allows us to offer physicians other tests like carrier screening and 22-2. I think our 2021 performance shows we are well positioned to leverage these trends, and we think these are multi-year drivers that we can continue to benefit from in the future. Diving into a quarterly view on the next slide shows that the business trends remain very strong in Q4 with total revenue growth outpacing volume growth. In addition, Quarterly sequential volume growth was strong at roughly 8%. This was one of the best sequential growth quarters we've ever had in spite of the fact that third quarter in 2021 was unusually strong for us because a large NIPT player exited the space in June and Q4 has fewer sessioning days due to the holidays. The underlying ASP performance was strong although we also had roughly $7 million in cash receipts from prior period true-ups and reserve benefits in Q3, which mutes the reported sequential pricing trends in Q4. $173 million in revenue was also well above expectations, and all the growth trends continue to look quite strong so far in Q1. On the next slide, I'm excited to share a new snapshot of the volume trajectory in our newer products. which, as you can see, have been growing rapidly. This is what I mean when I say cell-free DNA is just getting started in oncology and transplantation. The left chart is our volume progression in Signatera and Altera in oncology, and the right chart is Prospera and Renocyte in organ health. In oncology, the vast majority of these volumes are Signatera units ordered by physicians for clinical use, but this also includes very strong pharma performance. Based on our current run rate and publicly available data, We believe that we're very close to being the overall market leader by volume in the field of liquid biopsy, even when including both therapy selection and MRD testing categories. We think this performance is superior to any other MRD test on the market today. In addition, this rapid growth shows how big the MRD opportunity can be. We've been able to drive this level of early adoption, focusing primarily on colorectal cancer, which we think is still an underpenetrated market. Despite our historical focus on CRC, which represents less than 10% of the overall MRD opportunity, we are starting to see more volume come in for immunotherapy response monitoring in addition to MRD testing in other solid tumors beyond CRC. Some doctors start using signatera in colorectal cancer and then expand to use it as a multi-cancer tool. This is an advantage of our patient-specific tumor-informed assays. The same product can be applied to a broad range of cancer types without designing a new fixed panel for each tumor type. This growth is also impressive because 2021 was a building year for us with regards to our commercial and operational teams. We've now built a full commercial team that still has a lot of leverage left for growth. Paired with that, our robust lab operations now allow us to scale as we built out the infrastructure to optimize turnaround times and manage recurrent orders, both of which take time to master. We're in a great position to grow the market, but I think what's most impressive is our data leadership. We've got paradigm-shifting predictive data now in both colorectal and bladder cancers. We have over 100 additional studies underway, and it's possible we could publish more than 20 peer-reviewed papers in 2022 alone. In addition, in 2022, we will be receiving repeat testing volume from patients that started on Signatera in 2021, which is when the vast majority of our current patients initiated testing, driving continued growth for us. Overall, we believe we're in a very strong position to expand our leadership here and in the liquid biopsy field. In organ health, the majority of our volume in the slide is coming from Prospera orders, but it does also include a meaningful contribution from Renocyte. In 2022, we expect added momentum from the publication of the trifecta study in kidney, and we expect meaningful volume from the contribution of our recent launches in heart and lung, resulting from the publication of leading studies in those organs. It's worth noting that the commercial and operational infrastructure needed to support years of growth is largely built now, so we have an opportunity to get significant leverage out of our current team as centers adopt donor-derived cell-free DNA testing. You can see from this volume trajectory why we think we are positioned to be a top player in this space for years to come. For now, we will plan on providing the snapshot once annually on the Q4 call in order to preserve competitive positioning, but I think the 2021 volumes show that these are not going to be niche products, and we are on the path to achieving scale in these new areas. Now, let's move to the second major trend on the next slide. After gaining a full ACOG endorsement in 2020 for NIPT, adoption grew significantly in 2021. Even as the overall market for NIPT grew, based on our estimates, Panorama actually increased market share. As you can see on the right side of the chart, there is still a long way to go to get anywhere near full adoption. We've estimated that the NIPT market can reach 80 to 90 percent adoption in the coming years. In addition to growing adoption in the community setting, we are seeing growth from large group practices and health systems. For example, we recently just closed a system of over 10 hospitals that's now rolling out NIPT to its patients for the first time. We think that our competitive edge in winning these deals is our significant body of peer reviewed political evidence, our highly differentiated product, and our strong suite of user experience tools. For example, we're now fully integrated into leading EMR systems, making it easier for systems to adopt Panorama broadly. Additionally, Although it's the only state-sponsored prenatal screening program we are aware of in the United States, we think the state of California is likely to expand their existing prenatal screening program from high-risk only, in which Natera is already actively participating, to now include average-risk NIPT. We've been selected to participate in this program and are currently in discussions with the state. If we do choose to move forward, we would likely offer a lower-priced offering that screens for a narrower set of conditions, but we think that volume would increase as access is opened up by this program. We've already submitted for a unique PLA code for the more limited offering. In addition, we expect to offer other tests in our portfolio, like carrier screening, alongside the program as we enter new OBGYN offices. There are also a lot of key points in the program that are still under discussion, But we've gone ahead and built this into our forecast, taking a conservative approach to the impact of the change. Across all channels, OBGYN, MFM, hospital systems, et cetera, we think Natera remains very well positioned to extend its leadership position. The other opportunity that we see potentially compounding the value of increasing NIPT adoption is our ability to service the physician for additional tests that are routinely offered early in pregnancy. We think there are substantial growth opportunities here as our commercial team meets with more and more physicians to also expand our client base for other tests like genetic carrier screening that ACOG recommends to be offered to all pregnant women, regardless of ethnicity or age. Historically, Natera's carrier screening orders have scaled up together with our NIPT volume, and we think that trend will continue. Furthermore, we believe screening for the 22Q may soon be recommended as part of routine practice, which may further expand the value we can offer to our patients in ordering physicians. More on that topic on the next slide. As many of you saw in our press release, the landmark SMART 22Q microdeletion study was recently published in the Gray Journal, which is a premier journal among OBGYNs in the United States. SMART is by far the largest prospective study that confirmed genetic outcomes on all pregnancies in the study. The results were excellent. The incidence of 22q in the study was 1 in 1,524, which confirms 22q is one of the most common prenatal genetic disorders in the general population. And unlike trisomy 21, the incidence of the disorder is not impacted by maternal age. By comparison, cystic fibrosis, which is screened routinely, has an incidence of approximately 1 in 3,500 in the general population, And trisomy 18 and 13 have an incidence of 1 in 3,000 and 1 in 5,000, respectively. Panorama test results were accurate greater than 99.9% of the time, meaning that 99.9% of the time, the panorama result, whether high-risk or low-risk, was confirmed to be correct. For high-risk results only, we had a positive predicted value, or PPV, of 53%. meaning that more than one in two pregnancies screening high risk with panorama were confirmed to be effective using a confirmatory diagnostic test. This is really strong, especially compared to traditional prenatal tests like the quad screen offered routinely to all pregnant women in the United States for the past 40 years that have a PPV of only three and a half percent or one in 29. So the question remaining is, will this be recommended by ACOG for routine screening? Well, We don't control the outcome, but screen tests that offer the most clinical utility meet a few criteria. They screen for a serious disorder with high accuracy and high PPV. They catch many cases that are not otherwise captured by the existing standard of care, and early detection provides an opportunity to intervene and improve outcomes. In the case of 22Q, that means treatment with calcium at birth in order to mitigate potential seizures that can result in cognitive impairment. We think our 22Q microdeletion screen clearly meets all of these criteria. It's common, it's severe, it can be screened for with high accuracy, and there's an appropriate intervention. This sets up very nicely for a guideline change, but we will have to see where things end up. Okay, now let's spend a bit more time on the organ health opportunity. You saw the excellent traction we've been getting in Prospera on the earlier slide, and we see a lot of room for future growth. When we presented this slide in 2020, we estimated fewer than 5% of transplant recipients were getting cell-free DNA testing. While that has clearly grown, we think this chart shows PROSPERA can fill a significant unmet need in the coming years in what we believe is yet another large market opportunity. One driver we think can help increase adoption of cell-free DNA in this area is additional large prospective clinical trials that confirm the excellent performance of PROSPERA. While we're pleased with the data we generated thus far, we know that publishing the big prospective trials can really move the needle. Although our volume has been growing nicely, this is probably the biggest objection we face to the field. So just as we did in oncology and women's health, we've been investing heavily in data generation. Finally, after a ton of work by our team and our outside collaborators, in 2022, we expect a wave of prospective, strong, and meaningful data across kidney, heart, and lung transplantation, and we think this can make a significant impact for us. So first, a minute on the Trifecta study in kidney transplantation. This study was led by Dr. Phil Halloran, who's one of the premier researchers in the field. Trifecta had more than three times the number of biopsy match rejections than the DART study. Trifecta also enrolled patients from more than 20 U.S. and international sites. You can see the PROSPERA results from the initial readout were exceptional. The results were so strong that we believe it could eliminate the need for multimodality testing to rescue test performance. Multimodality testing using RNA and cell-free DNA is very expensive. We think it could cost roughly $6,000 per blood draw compared to PROSPERA, which is less than half of that price. So we look forward to publishing the trifecta study this spring, and we think it will be a really significant step forward for PROSPERA adoption. We also have two studies soon to be published in each of heart and lung transplantation. First in lung, we were pleased last fall to pre-release data from the largest prospective lung donor-derived cell-free DNA trial to date using a commercially available assay. The data was very strong and accepted for an oral presentation at ISHLG. We look forward to the publication of this paper in the near term. Finally, in heart, We previously announced the readout of our multi-site study that includes a prospective and retrospective arm. We showed an excellent overall AUC of 0.84 with greater than 250 prospective samples included in the study and greater than 100 retrospective samples for a total of greater than 350 overall. In fact, the AUC in the prospective arm was slightly higher than the retrospective arm. Again, This performance is very strong. It could eliminate the need to perform expensive multimodality tests that, in the context of heart transplantation, require cumbersome specimen processing, for example, spinning down the sample and shipping it on dry ice. Okay, now let me hand the call over to Solomon to provide an update on ecology. Solomon?